Trade Intensity and Business Cycle Synchronization: Are Developing Countries any Different?

By César Calderón, Alberto Chong, Ernesto H. Stein. 2003

482 citations recorded by the source corpus.

Some key criteria in the optimal currency area literature are that countries should join a currency union if they have closer international trade links and more symmetric business cycles. However, both criteria are endogenous. Frankel and Rose (1998) find that trade intensity increases cycle correlation among industrial countries. We study whether the same result holds true for the case of developing countries, as their different patterns of international trade and specialization may lead to cyclical asymmetries among them and between industrial and developing countries. We gather annual information for 147 countries for 1960-99 (33,676 country pairs) and find: (i) countries with higher bilateral trade exhibit higher business cycle synchronization, with an increase of one standard deviation in bilateral trade intensity raising the output correlation from 0.05 to 0.09 for all country pairs; (ii) countries with more asymmetric structures of production exhibit a smaller business cycle correlation; (iii) the impact of trade integration on business cycles is higher for industrial countries than both developing and industrial-developing country pairs; (iv) a one standard deviation increase in bilateral trade intensity leads to surges in output correlation from 0.25 to 0.39 among industrial countries, from 0.08 to 0.10 for our sample of industrial-developing country pairs, and from 0.03 to 0.06 among developing countries; (v) the impact of trade intensity on cycle correlation is smaller the greater the production structure asymmetries between the countries.

View Paper: https://www.semanticscholar.org/paper/b2502e3a2db1c98e7c1255495ea4859300040a89

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Citations in the corpus

• Financial Regulation, Financial Globalization and the Synchronization of Economic Activity (2009, unknown): “Following Calderon et al. (2007) we control for di↵erences in trade intensity using the log of bilateral real (deflated with the U.S. price deflator) exports and imports as a share of the two countries’ GDP.”
• How Does Globalization Affect the Synchronization of Business Cycles? (2003, unknown): “Calderon et al. (2002) Ž nd that trade linkages play a more important role in explaining business-cycle”
• Will business cycles in the Euro Area converge: a critical survey of empirical research (2008, methodology): “Also Calderón et al. (2007) find a lower impact of trade intensity than Frankel and Rose for their full sample; however, their results for OECD countries are similar to those of Frankel and Rose.”
• Stock market synchronization and monetary integration (2011, background): “Calderon et al. (2002) find similar evidence for developing countries, for which we could expect that specialization along the lines of comparative advantage is more important.”
• Housing Cycles and Macroeconomic Fluctuations: A Global Perspective (2012, background): “However it is a well-known empirical regularity that countries with tight trade linkages experience higher business cycle comovement (see Frankel and Rose (1998), Calderon, Chong, and Stein (2007)).”
• Can the Standard International Business Cycle Model Explain the Relation between Trade and Comovement? (2005, unknown): “ωijm1−α ij #1/(1−α) − p1jm1j − p2jm2j − p3jm3j ( 11 )”